In 2014, India did something no major economy had tried before. It passed a law forcing large companies to spend at least 2% of their average net profits on social good, from education and healthcare to environmental projects. The idea was simple: if the market wouldn’t push businesses to invest in society, the government would.
A decade in, a new question has emerged. What happens to a company’s stock price when charitable giving stops being a choice and starts being a rule? A study published in Applied Economics takes on that question, and its answer complicates the popular story that corporate social responsibility (CSR) is always good for business.
A natural experiment in Mumbai
Atul Ghorpade and Sabuj Kumar Mandal of the Indian Institute of Technology Madras, along with Alberto Posso of Griffith University in Australia, wanted to know whether India’s mandate hurt or helped shareholders. Most previous research on CSR has looked at voluntary programs, where companies choose to invest in social projects. In that setting, firms that spend on CSR often perform better financially. But researchers have long debated whether CSR actually causes those gains, or whether well-run companies simply tend to do both good business and good works.
India’s mandate offered a rare opportunity to separate the two. Because the law affected some companies and not others based on clear financial thresholds (net worth above ₹5 billion, revenue above ₹10 billion, or profit above ₹50 million), it created what economists call a natural experiment. Two roughly similar sets of firms suddenly faced very different rules.
The researchers gathered data on 2,017 companies listed on India’s National Stock Exchange between 2010 and 2022, yielding more than 19,000 firm-year observations. They pulled actual CSR spending figures from the Prowess database, giving them a direct measure rather than the ratings and disclosure scores that most prior studies have relied on.
The core finding: shareholders lose ground
The main result runs against the “doing well by doing good” narrative. Companies subject to the CSR mandate saw their stock returns fall relative to companies that were not covered by the rule. The effect was economically meaningful. Doubling a firm’s CSR expenditure was associated with a decline in stock returns of roughly 0.13 to 0.36 percentage points, or about 7% to 19% relative to the average annual return in the sample.
To sharpen the comparison, the researchers used a technique called difference-in-differences. They compared two groups: firms that had been voluntarily spending on CSR before the law (and simply had to keep doing so) against firms that had not been spending before but were now required to. If the mandate itself was driving stock movements, the second group should show a bigger negative reaction after 2014. That is exactly what the data showed.
The authors ran the same question through several other statistical checks, including instrumental variable methods, a regression discontinuity design that zoomed in on firms hovering just above and below the profit threshold, and a synthetic control approach. All pointed to the same conclusion: the mandate was associated with lower stock returns for affected firms.
Why spending more doesn’t help
One might expect that companies going above and beyond, spending more than the required 2%, would be rewarded by investors. The study found no such effect. Firms that spent below the mandate, exactly at the mandate, or above it all experienced similar return patterns.
The researchers interpret this as a loss of what economists call “signaling value.” Before 2014, when a company chose to invest in social projects, that choice told investors something. It suggested strong governance, financial slack, and confidence about the future. Once every eligible firm had to spend the same percentage, that signal disappeared. Doing more no longer set a company apart, because investors had no way of knowing whether the extra spending reflected genuine strategy or simple regulatory compliance.
The risk channel
Digging into why returns fell, the authors examined how the mandate affected each firm’s exposure to broader market swings, a measure known as beta. They found that CSR spending was associated with higher beta among mandated firms. In other words, these companies became more sensitive to overall market movements.
The researchers describe three reasons this could happen. First, mandatory CSR spending is a fixed cash outflow that cannot be trimmed during a downturn, making a firm’s cash flows more sensitive to the economic cycle. Second, the loss of signaling value increased information gaps between managers and investors. Third, investors may view mandatory spending as a form of tax that limits managerial flexibility over how capital gets allocated.
Normally, higher risk is expected to come with higher returns, since investors demand compensation for volatility. But in this case, the extra risk was not paired with extra reward. The authors connect this to what finance researchers call the “low-risk anomaly,” a pattern where certain kinds of increased risk do not translate into higher expected returns, particularly when the risk stems from policy changes rather than genuine business opportunities.
What it means, and what it doesn’t
The study is careful about generalization. India’s rules are unusual: most countries treat CSR as voluntary, and evidence from voluntary regimes in the United States and even China often shows the opposite pattern, with socially responsible firms outperforming their peers. The authors argue that the negative results in India stem from the mandatory design of the rule, not from CSR spending itself.
For policymakers, the paper suggests that flexibility matters. The authors propose that governments considering similar rules could offer tax credits for voluntary overspending, which might restore some of the signaling value that a flat mandate erases. For managers, the takeaway is that exceeding the 2% floor did not deliver a stock-market payoff in India’s setting. For investors and ESG fund managers, the researchers argue that CSR spending under a mandatory regime should not be read as a value-enhancing signal in the way voluntary CSR often is.
Several caveats are worth noting. The study measures stock market reactions, not real-world social outcomes. A regulation that hurts shareholder returns might still produce net benefits for society through better schools, cleaner air, or improved public health. The researchers also acknowledge that immediate negative returns may reflect investors pricing in regulatory costs rather than any deterioration in the underlying business. Long-run operational benefits from CSR, documented in some other studies, may take longer to appear in stock prices.
The study also cannot address what would have happened if India had chosen a different design, such as a lower spending threshold, tax-based incentives, or industry-specific rules. Those alternative paths remain open questions for future research.
